Wall Street Week Ahead: Greek elections to keep tensions high

NEW YORK: Instead of backyard barbecues and beer, this Father's Day could see many investors with their minds on Greece.
The
Greek election, that is. One thing is almost certain to come from the
Sunday event, and that is more volatility for U.S. stocks, according to
analysts and investors.
"I think the S&P futures will see
their high or low depending on the outcome within one hour of the
futures' opening on Sunday night at 6 p.m. Eastern time," said Elliot
Spar, option market strategist at Stifel Nicolaus & Co.
Analysts
have viewed the Greek election as a potential turning point for Greece,
with all eyes on whether voters will favor the leftist Syriza party
opposed to the austerity measures that are part and parcel of Greece's
international bailout package, or the conservative New Democracy, which
is committed to upholding terms of that agreement.
The election,
which could result in Greece's eventual departure from the euro zone, is
also seen as another hurdle for the wider euro zone, which has been
embroiled in a debt crisis for well over a year.
The rest of the
week is not likely to be any quieter. The Federal Reserve is due to
release a policy statement on Wednesday at the end of its two-day
meeting, and the steady flow of sovereign debt warnings and downgrades
is likely to continue.
Central banks from major economies are
ready to take steps to calm financial markets should the outcome of the
Greek elections create a market storm.
In yet another sign of
investor nervousness, the CBOE Volatility index <.VIX>, Wall
Street's fear gauge, was up for much of Friday, even as stocks rose,
although the VIX finally closed lower. Stocks and the VIX typically have
an inverse relationship.
One likely outcome of the Greek election is the failure of any party to form a coalition government, said Gregory Peterson, director of investment research at Ballentine Partners LLC in Waltham, Massachusetts, which manages $3.5 billon.
"I
think that's a fairly high probability outcome," he said. "It's going
to leave a lot of heads scratching, and that's probably not going to be
good for the market."
A more bearish outcome would be one that
presages an unraveling of the euro zone, said Peterson, whose firm
starting reducing its exposure to European assets "over a year and a
half ago."
Many investors have been trying to prepare for the worst.
"People
have been hedging their positions aggressively over the past two weeks
heading into this weekend," said Alec Levine, derivatives strategist at Newedge Group SA in New York.
"No
matter what happens next week, we will return to a massive game of
chicken between the newly elected Greek government, whoever that may be,
and the EU, specifically Germany."
THE FED AHEAD
Despite the fears, stocks ended the week on a positive note, marking a second straight week of gains. The benchmark Standard & Poor's index <.SPX> is now up 6.8 percent for 2012, though still well off its highest levels of the year.
Part
of what has spurred optimism for stock investors in recent weeks has
been the hope that the Fed and other central banks would act to provide
more economic stimulus. There has been continuing speculation over
whether the Fed will engage in a third round of quantitative easing.
"We
do think that expectations of QE3 will drive the market one way or the
other," said Omar Aguilar, chief investment officer for equities at Charles Schwab Corp, in San Francisco.
But
the fact that the Fed has made no recent changes to policy could mean
the economic data policymakers are seeing is "not as bad as everyone
thinks," said Aguilar.
Weeks of worries over potential outcomes
of the Greek election have prompted a number of central banks to prepare
for market problems.
Among them, European Central Bank President Mario Draghi said the ECB was ready to step in and fund any viable euro zone bank that gets in trouble. The Bank of England on Thursday announced a 100 billion pound ($155 billion) offer of loans to banks.
Also
ahead of the vote, Russell Indexes said certain events in Greece could
mean changes in its indexes through implementation of its "financial
crisis" rule. Its indexes include the Russell Global Index.
ON RATINGS WATCH
Adding to investor nervousness has been a slew of recent ratings cuts.
Among
the most recent, Fitch Ratings on Friday downgraded Egypt's sovereign
credit rating deeper into junk status. On Thursday, Egan-Jones cut
France's sovereign credit rating.
Many investors see that trend
continuing as agencies try to gauge the impact of the euro zone and
other problems on the global economy.
"We're probably going to see more of it," said Peterson. - Reuters